A bank has $100 million in checking deposits with interest and non-interest costs of 8%,$600 million in savings and time deposits with interest and non-interest costs of 12%,and $100 million in equity capital with a cost of 26%.The bank has estimated that reserve requirements,deposit insurance fees and uncollected balances reduce the amount of money available on checking deposits by 20% and on savings and time deposits by 5%.What is the bank's before-tax cost of funds?
A)13.44%
B)13.25%
C)15.33%
D)19.17%
E)None of the options is correct

Question

Quizplus · Accepted Answer

The bank's before-tax cost of funds is calculated by taking into account the effective costs after adjusting for reserve requirements and other reductions. The effective checking deposits are $80 million (80% of $100 million), and the effective savings and time deposits are $570 million (95% of $600 million). The weighted average cost of funds is calculated as follows: [(8% * $80 million) + (12% * $570 million) + (26% * $100 million)] / ($80 million + $570 million + $100 million) = 13.44%.

A Bank Has $100 Million in Checking Deposits with Interest